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Purchased Goodwill

An asset may be defined as a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) might be expected. Such types of non monetary assets are known as Intangible Assets. These assets have the following characteristics:

Even though intangible assets don't have the obvious physical value of a factory or equipment, they can be quite valuable for a firm being quite critical to its long-term success or failure. Companies often own many such things of value, known as assets that cannot be touched, felt, or seen. These consist of patents, franchises, trademarks, brand names, and economicgoodwill. Economicgoodwillusually consists of the intangible advantages a company enjoys over its competitors such as an excellent reputation, strategic location, business connections, etc.) . All such points are covered inAccountinghomework helpandassignment helpattranstutors.com.

Goodwillmay be defined as the assumed value of the attractive force that generates sales revenue in a business, and adds value to its assets.It is the type of an intangible but saleable asset, almost indestructible except by indiscretion. It is built by the company or brand painstakingly over the years generally with heavy and continuous expenditure in promotion, creation and maintenance of durable customer and supplier relationships, high quality of goods and services, and high quality and conduct of management and employees.Goodwilloften includes the worth of corporate identity, and is enhanced by corporate image and a proper location. The valuation of goodwill is not recognized in account books but is realized when the business is sold, and is reflected in the firm's selling price by the amount in excess over the firm's net worth. In well established firms, goodwill may be worth many times the worth of the physical assets owned by the firm. GAAP requires the firm's purchaser to write off (amortize) the amount paid asgoodwillover a period (usually 10 to 30 years) for the purpose of financial reporting.

Goodwillgenerally possesses the following attributes:

Goodwillmust be of a very enduring nature;

Goodwillis attributable to cash flows expected from business activities in future; and

Goodwillmust have a significant commercial value (i.e., must be transferable to a third party).

According to the difference of source,goodwillis can be of two major types, they are:Purchased goodwilland internally developed goodwill.Purchased goodwillis calculated as the difference between the cost of the acquisition and the sum of fair value of identifiable assets and liabilities. To put it straight,Purchased goodwillis the goodwill which is the surplus over the fair value of the net assets which someone is prepared to pay for the business.

Moreover, it is amortized using the straight-line method with no more than 10 years and recorded as expenses in the accounting method. All these points are taken care of by the experts providingAccountinghomework helpandassignment helpattranstutors.com.

The capitalizable cost ofpurchased goodwillis the difference between the purchase price of an acquired business and the fair market value of the identifiable net assets of the acquired business

For example: suppose a corporation purchased a business at a cost of $1,000,000; the book value of the identifiable net assets of the business were $700,000; the fair market value of the identifiable net assets of the business were $900,000

THEN, Goodwill = 1,000,000 – 900,000 = 100,000

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